How social democracy can triumph in the 5-75-20 society

Policy Network
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24 April 2014

In the six years since the 2008 global financial crisis, progressive politics has been struggling to find a new identity. In an over-reaction against the third way experience, it “threw out the baby with the bathwater”: instead of analysing carefully what Tony Blair, Bill Clinton, Wim Kok, Gerhard Schröder and others got wrong, it yearned for a lost era of egalitarian basics without clearly working out what that meant and what its electoral implications would be. It saw the massive failure of markets as an opportunity to bring back the state when in fact rising public debt led to a crisis of the state, which in the public mind loomed larger than the crisis of the market. It struggled to formulate a publicly compelling alternative to austerity. In most countries, it has had to contend with the rise of anti-establishment populism, sometimes of the left, but mostly of the radical right.

Yet despite all these difficulties, the unpopularity of incumbent centre-right governments and coalitions, and the political fragmentation of their support, has enabled the centre-left’s return to power where a new generation of social democratic leaders are being forced to define for themselves a principled, but tough minded and realistic approach to government in harsh and difficult times. However, to make a success of this political turn of fortune, an effective capacity to govern and a winning electoral strategy depends on an accurate understanding of social trends and attitudes in what we term the ‘5 – 75 – 20 society’. This essay offers some key reflections on this theme.

A lot of attention has focused on what has been argued is a fundamental dividing line in the potential electoral constituency of progressive politics between ‘cosmopolitans’ and ‘communitarians’. In simplistic terms, ‘cosmopolitans’ are the winners from globalisation: consisting of the better educated (often female) and mobile workers, as well as ethnic and migrant groups building new lives in prosperous European communities; ‘communitarians’ on the other hand, tend to be white, predominantly male, working class voters, keen to defend the welfare state and a traditional way of life and see globalisation, economic change and membership of the European Union as a threat, not an opportunity.

This polarisation has occurred in many European countries as well as in the US for more than a decade and has already had significant political consequences. In Austria, France and the Netherlands, for instance, right-wing populists have been particularly successful at syphoning shares of the former left-wing working class electorate that feels ‘abandoned’ to the profit of white collar elites and migrant communities. These voters see themselves as the ‘losers’ from the ‘hour glass’ economy; they suffer from the decline in secure and well paid jobs for manual workers and think that life for them and their families has declined from a presumed ‘golden age’. In many respects, the rise of UKIP support among this category only signals the ‘normalisation’ of Britain’s situation vis-à-vis its continental neighbours.

Parties of the centre-left have sought to respond to the concerns of this group: ahead of the 2012 French presidential election, ‘Gauche populaire’, a group of public intellectuals close to the Socialist Party (PS), argued that the PS should tackle more resolutely the sources of economic and cultural anxiety that afflict its traditional working class supporters. In Britain, ‘Blue Labour’ sees working class alienation from social democracy as the result of the third way’s emphasis on the necessity of continual economic change, a language of aspiration not assurance and security, and a perceived welcoming of mass migration. Similar debates can be heard between factions in many of Europe’s centre-left parties.

This essay argues that it would be a mistake for social democrats to become over-obsessed with this communitarian/cosmopolitan dividing line. Voters who think migration is the most important issue facing the country are unlikely to be persuaded to back the centre-left in future by the party apologising for alleged past mistakes or promising a crackdown on migrant ‘benefit tourism’. This is not to deny that there may be issues that have to be addressed, simply that social democrats are unlikely to gain electoral traction on them.

Instead, social democratic parties should pay more attention to the concerns of what we term the ‘new insecure’, which in our view embraces both groups: the 75% of our society that are neither in the 5% elite that, in income terms, is racing ahead, nor in the 20% who are poor and often marginalised. Put differently, a stable governing majority cannot be fashioned on the basis of appealing simply to the bottom 20%, even with the voters of an altruistic middle class added in. Nor can a credible electoral programme be fashioned for a strategy of redistribution from the elite: from conventional sources of income tax, there simply isn’t enough money to spread around. Social democracy’s new majority has to be built on something more radical than compensatory redistribution.

The ‘new insecure’
Weaker life-chances, lack of opportunity and increasing insecurity are no longer afflicting only the most excluded groups. For some time now growing sections of our societies are suffering from uncertainty, and in some cases declining real wages and incomes.1 The ‘new insecure’ have to cope with global economic forces and the spread of technology. They struggle to adapt to the social realities of falling living standards, feel the growing pressures of ‘earning’ and ‘caring’ in family life, and fear that life for their children will not be as good as for them in the face of pressures on pensions, access to decent health services, the costs of going to university and house price inflation.

To be sure, every industrialised country will have variations in its class structure. Nonetheless, the dominant trend in the last two decades has been towards the creation of a ‘5-75-20’ society in the developed western economies:

Roughly 5 per cent who are enjoying ‘runaway’ rewards at the top, as asset prices and returns to wealth soar – a group largely composed of professionals working in finance and property, the corporate elite and successful entrepreneurs, as well as those who inherit significant wealth.2

75 per cent in the middle who are either in work or have a retirement income, but are relatively insecure and often anxious about the future. Large parts of this group consists not only of ‘blue-collar’ industrial workers threatened by outsourcing to Asia, but also groups of middle-class professionals who fear their jobs will be next as the emerging ‘MINT’economies move up the economic value- chain.3 Once secure professionals – such as academics, mechanical engineers and natural scientists – who are relatively worse off than their counterparts were a generation ago and who may be struggling to sustain their standard of living fall into this group as well.4

And the 20 per cent at the ‘bottom’ of society who struggle in a vicious cycle of low-wage, irregular work, unemployment and limited access to welfare and are arguably ‘outsiders’ in the labour market and struck down by entrenched social immobility.5

The inequality, polarisation and growing insecurity which characterises the new class structure of the industrialised countries is being exacerbated by structural forces alongside economic and social change. Part of this is evidently to do with new economic forces: technology and automation; globalisation and trade liberalisation, and taxation policies in particular. The starting-point is that more than 75% of employment in the OECD countries is now in services6 and job growth is occurring in service-orientated sectors (both high and middle skill levels). In the US and Europe, employment patterns are changing dramatically (see tables 1 and 2).

The centrality of services to employment has meant that SMEs represent a vital economic backbone: there has been an increasing concentration of employment within SMEs. Europe’s 20 million SMEs employ almost 90 million people.7 Moreover, between 2002 and 2010, net employment in the EU grew significantly, by an average of 1.1 million jobs (or 0.9%) each year. 85% of this net increase occurred in SMEs, indicating that the share these firms have in employment growth is much bigger than the 67% share of these firms in total employment.8

Table 2:EU employment patterns

Past and likely future sectoral employment EU-27 2000-2020.

However, it is the shift in the nature of the service-driven economy that is most significant. The analysis of the impact of ‘automation’ and the ‘Big Data revolution,’ where relatively highly skilled, human-capital rich jobs once performed by people are now performed by machines is increasingly in vogue.10 Technological change not only threatens the position of lower skilled workers, but those in ‘white-collar’ and professional occupations. The tendency is for labour productivity gains to increasingly benefit an ever smaller group at the top, leading to the further squeeze on nominal wages.11 Moreover, an increasing share of GDP is flowing to capital at the expense of labour as technology replaces human workers. Nonetheless, technological change cannot be blamed solely for rising inequality and adverse economic outcomes.

The increasing volume of trade in the global economy as product, capital and labour markets are ever more liberalised puts further downward pressure on the wages and incomes of the middle. In many countries (although not the Nordic states), the structures of collective pay bargaining that have traditionally protected middle-income jobs and living standards are being eroded; neither is the public sector a ‘safe haven’, as the impact of austerity means that insecurity is spreading to the public sector professions. As the emerging market economies move up the productivity value-chain, so the competitive threat to workers in the industrialised states grows more acute, even though there may be some opportunities for ‘re-shaping’ activities that need to be ‘close to market’. Europe’s chances of seeing significant re-industrialisation are limited by both its high energy costs and the central flaw in its approach to climate change – the attempt to restrain carbon ‘production’ in Europe, not carbon ‘consumption’.

This point is emphasised by Anne Wren, who notes that there has been a major shift in the type of workers exposed to international economic forces.12 Whereas in the 1970s and 1980s, ‘blue-collar’ workers in less skilled occupations were most vulnerable to global competition, today middle-class professionals find themselves under unprecedented threat. The ICT revolution has meant that high skilled employment in service sectors such as finance, law, media and business has become more internationally traded, increasing the extent of middle-income exposure to global competition and heightening job insecurity.

As a result, wage inequalities are accelerating as there is a secular decline in the relative economic position of middle-income households. For example, according to analysis by Gregor Irwin, median household incomes in Germany between 2000 and 2010 have consistently lagged behind GDP growth. In Japan, median incomes have fallen by an average of one per cent a year since 1995. In the UK, median income growth since the mid-2000s has fallen to zero. 13 This change in the distribution of growth away from the middle is arguably a structural shift rather than a cyclical trend.

As the impact of these shifts has worsened in many industrialised states, taxation systems appear to be becoming less redistributive and progressive. It is sometimes forgotten that post-war taxation and welfare state regimes in Northern Europe were widely supported by middle-income groups, not only the poor, recognising that collective social provision and progressivity in the tax base protected their relative position in the distribution of earnings and rewards. Too often, these institutions and systems have been gradually eroded by the growing pressures towards restructuring, targeting and the residualisation of the welfare state: those on middle-incomes are losing their stake in social security. Yet the middle ‘75%’ are the ‘new insecure’ who need collectivised social security to be assured of dignity and income adequacy, especially in retirement.14

Nevertheless, there are wider structural trends beyond economic forces: one set of social trends relates to what Gøsta Esping-Andersen has termed the ‘unfinished’ gender revolution in western societies.15 While the balance of caring and earning roles is being renegotiated between women and men, women continue to face major pay penalties and inequalities in labour market outcomes. On average, women in the EU earn around 16% less per hour than men. The gender pay gap exists even though women do better at school and university than men. Eurostat 2011 figures show that 82% of young women reach at least upper secondary level education in the EU, compared to 77% of men. Women also represent 60% of graduates in the EU. The problem is that Europe is squandering its explosion of female talent.16 Only 59% of working age- women (20-64 years old) are active in the European labour market, compared to a 70% employment rate for men.17

Moreover, families are under pressure as the increase in working hours coincides with rising care costs, both for childcare and elderly care. Apart from weakening family life, the risk is that women in particular are either forced out of employment, or compelled to accept jobs some way below their labour market potential, which undermines economic growth and productivity. The ‘new’ social risks include inter-generational imbalances and skills-related inequalities.

Finally, our ageing societies are putting further pressure on welfare systems while potentially weakening long-term growth, as larger numbers of older workers drop out of the labour market. The International Monetary Fund (IMF) recently warned that the impact of demography on public finances will be considerably greater than the financial crisis: in the EU, the cost of pensions is expected to rise from 10.2 to 12.6 per cent of GDP by 2060; healthcare will increase from 6.7 to 8.2 per cent.18 Maintaining an active workforce relative to the retired population is necessary in the long-term to pay for state services, which is likely to refocus debate about the necessity of migration in continental Europe. Europe’s high rate of unemployment, particularly youth unemployment, has further weakened the long-term viability of welfare states, acting as a drag on growth.

Predistributive reform and multi-level governance
In light of these deep structural challenges, progressives need to advocate bold reforms built around a predistributive strategy designed to promote the growing numbers of the ‘new insecure’, while tilting the balance of structural advantage towards those from low and middle income households. Yale Professor Jacob Hacker has described predistribution as about ‘making markets work for the middle class’.19

This deviates from earlier third way thinking since predistribution acknowledges that markets left to their own devices will not deliver socially efficient or just outcomes and that the third way failed to provide a positive account of the active state’s role in regulating a complex and structurally unstable globalised economy. It also recognises that the traditional strategy of redistribution puts centre-left parties in an untenable position, since a growing chorus of complaint about ‘free-riding’ and ‘undeserving’ groups dependent on welfare provision erodes trust in the social contract.

The locus of predistribution is to rebuild support for collectivised security and public service provision by reducing structural dependency on the state, tackling the underlying causes of wage and income inequality instead of relying on post hoc redistribution. The predistributive strategy begins with the need to develop countervailing powers to shape the outcomes of markets, rather than leaving markets free to operate without oversight or intervention:

Macroeconomic reform to correct sectoral and distributional imbalances. Aggressive monetary policy intervention such as quantitative easing helped to prevent the 2008 crisis from turning a recession into a depression, but the long-term impact has been a major redistribution in favour of the top five per cent in the ‘asset-earning classes’. Those who depend on wages and interest on savings in retirement have been particularly hard hit. At the same time, the strategy of nominal inflation targeting in central banking, including in the European Central Bank, has to be reconceived to fight deflation and prioritise full employment and growth, especially in Southern Europe.

Tax reforms are urgently needed to make taxation regimes more progressive. Policy-makers must focus their attention on assets such as property, and unearned income such as inheritance, which are by definition more immobile and therefore harder to evade. Taxation systems are more likely to be progressive if a system of tax credits is adopted, rather than raising tax thresholds, which tends to benefit higher income earners. Tax credits can be used to support the incomes and childcare costs of relatively hard-pressed middle class families, rather than just the lowest earners in making work pay.

A revamped education and skills strategy to address the technology and automation challenge. All governments since the 1990s have paid lip service to the importance of lifetime learning. Now, more than ever, it is a necessity as workers have to adapt to new technologies throughout their working lives. ‘Jobs for life’ are also in decline with average job tenure rates in the US down to 4.64 years, and between 8-12.5 years across European countries respectively.19 A personal learning account where individuals can invest in their own human capital as well as further and higher education – with incentives from the state through tax breaks and subsidised loans – would generate a new culture of active education and learning ‘from the cradle to the grave’. Equally vital is to protect investment in early years’ intervention and education, the best approach to narrowing cognitive gaps between children from low and high income households.20

Measures to democratise human capital and asset ownership. The ‘jobs for wages model’ is increasingly under pressure as technological change and the global labour force weakens the bargaining position of middle-income as well as low skilled workers. If more groups are to share in the fruits of rising prosperity, the distribution of assets and the spread of ownership will need to be significantly expanded. Three areas are especially important. First, widening the base of employee share ownership and profit sharing. Second, expanding the pool of home owners, not by encouraging reckless lending to vulnerable households, but through a major extension of ‘part rent, part buy’ schemes through which an asset stake can be accumulated gradually over time, combined with major capital investment in housing infrastructure. Finally, fashioning an EU-wide ‘baby bond’ – an asset stake to which every child born in the EU would be entitled through a combination of government contribution and parental saving, addressing the distribution of assets as well as incomes.

Measures to make the labour market fairer by developing countervailing pressures to economic forces that accentuate polarisation and inequality. Liberal market economies in particular have promoted the goal of employment creation, but at the expense of rising wage inequalities for which the state needs to make increasingly costly compensation. More effective protection includes statutory minimum wages and sectoral intervention in low wage sectors of the economy, as well as encouraging mechanisms of association through trade unions, employees’ representative organisations, and social networks to organise workers in low skilled sectors, strengthening their capacity to negotiate collective pay bargaining arrangements and wage agreements. The Nordic states have shown how structured approaches to wage negotiation are consistent with open, globalised economies.

Expanding service sector jobs in caring sectors to widen employment opportunity. This requires deindustrialised countries to rebuild their traded and export-led sectors through policies designed to promote innovation and new industrial policy, using the fruits of growth to provide high quality public services while providing opportunities for the less productive majority of workers in the ‘non-traded’ services sector.21 This is where most jobs for the low to middle skilled in the industrialised economies will be created, further helping middle-income families by ensuring a supply of high quality caring services. Another challenge relates to expanding productivity in these sectors through new technologies and investing in the up-skilling of the workforce.

Structural reforms to improve the quality of public services. A key pillar of middle- class security is the ability to access high quality collectively provided services, such as health and education, which the market cannot be relied upon to provide. Nonetheless, as real incomes rise over generations, citizens naturally come to have higher expectations of public services, and are willing to invest additional disposable income via taxes or alternatively, through private provision where their aspirations are not being satisfied. Moreover, technological change, demography and ageing are imposing new cost pressures on healthcare and education systems. In an era of constrained resources, it is vital that structural reforms can be implemented to make services more effective and cost efficient.

Championing gender equality remains the key to rebuilding support for inclusive and broad-based social security. Most industrialised countries over the last three decades have witnessed the rapid entry of growing numbers of women into the labour force, but this remains an ‘unfinished revolution’.22 Women appear to have a comparative advantage in high-skilled service sector occupations, while the evidence is that women in employment are significantly more likely to support welfare state policies such as universal childcare, adequate elderly social care, shared parental leave, public employment and collective service provision.23 These policies must be combined with measures to reduce employment and pay discrimination in labour markets, eroding the ‘motherhood pay penalty’ too many working women still face.

Finally, investing in infrastructure and SME formation as a spur to growth. Social democrats need a strategy for dynamic production and wealth creation, not only fairer distribution. Supporting entrepreneurial job growth in the SME or ‘dynamic’ services sector is the new politics of production. The best way to support the living standards of middle-income earners is to ensure sustainable economic growth, which leads to rising nominal wages and an expanded tax base to be reinvested in caring services for families. Boosting growth in Europe requires structural reforms, not short-term fixes through public and private debt financing. This includes improving access to finance for SMEs and mid-caps, promoting high-tech manufacturing through investment in Research and Development, and strengthening the role of the higher education sector in technology and innovation diffusion. Reinforced public investment banks, including the European Investment Bank, have a crucial role to play in modernising and upgrading member states’ long-term productive capabilities.

Many of these measures will need to be implemented through effective European institutions which ensure not only recovery and resilience after the financial crisis, but long-term growth, improvements in social well-being, and ecological sustainability. This will not happen by side-lining the EU in the untenable pursuit of a strategy of ‘predistribution in one country’: there has to be co-ordinated international action and cross-national benchmarking led by a strong European Union among a diversity of nation-states. The onus is on a new generation of centre-left leaders to translate these concepts into operational principles and policies and bend the arc of EU policymaking away from the ‘engine of neo- liberalism’ critique. The EU has to become the engine of progressive capitalism, with nation states acting in concert to pursue national interests.

No return to ‘defensive’ social democracy
A new landscape of distributional conflicts and deepening insecurity is opening up that presents a big space for social democracy. The wealthy few enjoy unprecedented rewards and the most excluded groups continue to suffer adverse life-chances, but it is the broad-base of society – the 75 per cent – which more than ever feels the spread of insecurity given the squeeze on incomes that has taken place in the last decade.

The political imperative is that social democrats have to devise new welfare state policies that appeal to the 75 per cent (and at the same time benefit the bottom 20 per cent) rather than making top-bottom inequality the basis of their appeal, or surreptitiously targeting resources to the bottom.

First and foremost, this means that the centre-left must not return to what the late Tony Judt termed ‘defensive’ social democracy. The traditional welfare states of the post-war era cannot be recreated in a world of greater complexity and social change; today’s younger generation is both an individualistic and ‘networked generation’ who identify their interests with flat, non-hierarchical structures, rather than the vertical institutions of the 1945 settlement.

Likewise, social democracy will neither find salvation in crude distributional politics, nor a flirtation with political populism. The politics of handing out ‘sweeteners’ to deserving electoral groups is a fraught political strategy in an age of acute fiscal constraint. Bending to populist attacks on globalisation and the European Union also ignores the reality that today’s world is more internationalised and interconnected than ever before.

The greatest challenge for social democrats, therefore, is the battle to sustain political coalitions in favour of collectivised social security and public provision in a world where structural change may be eroding the cross-class coalition in favour of welfare states. Highly skilled workers in sectors that are more exposed to global competition may be increasingly unsympathetic to spending on redistribution and the welfare state, and are less likely to support centre-left parties. There are fewer middle-income professionals in ‘sheltered’ public sector occupations prepared to unconditionally support welfare state spending than was the case in the ‘golden age’ of the post-war welfare state.24

Writing a fairness contract for the ‘new insecure’ depends on the centre-left’s ability to politicise and lead a strategy premised on predistributive reform and multi-level governance. It has to stand up for the 75 per cent if it is to help those most in need in our societies, to maintain consent for universal social security, to generate the growth needed for investment in public goods, and to ensure a dynamic economy and society. As the great Swedish social democratic leader Olof Palme once declared: ‘secure people dare’.

11. Osborne, C.B. and M.A. Frey. (2013). ‘The Future of Employment: How Susceptible Are Jobs to Computerisation?’ Paper for the Oxford University Engineering Sciences Deparment and the Oxford Martin Programme on the Impacts of Future Technology Workshop on ‘Machines and Employment”, 2013.

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30 November 2014 13:20

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.